AT Consumer Products: The Decision to Outsource

Part    1.         Introduction

The business organization to be studied for this thesis will be the American Telegraph and Telephone Consumer Product, or AT&T CP, which is 1 of the 2 sectors under the bigger AT&T organizational structure.  AT&T CP is the telephone manufacturing sector of AT&T, and this case study will analyze the decision-making involved in AT&T CP's decision to outsource its telephone manufacturing facility to Singapore.

The case study analyzed for this paper will be “AT;T Consumer Products” by Badaracco and White (1993), Harvard Business School Case # 392-108 (see Appendix for full copy of the case study).

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Section a.     Nature of Work

Prior to its decision to outsource, the nature of work AT;T CP is involved in is the manufacturing of electromechanical telephones in the US.  Starting from the 1980s, however, the department started to experience serious competition from Asian companies like Taiwan, Hong Kong, Japan, and Korea, which all offered telephone models at much lower costs than the US-manufactured electromechanical telephone units.

The onslaught of such competition meant trouble for AT;T CP since before 1983, it had never even sold as much as a telephone cord.  Ironically, AT;T's telephones were never designed to be marketable.   The department had a "we make it, you take it" approach with regard to the telephone models they offered their customers.  This has resulted in the sector's declining revenues and unacceptable profit levels (Badaracco and White, 1993).

Thus, AT;T CP decided to explore the idea of off-shore manufacturing operations in Asia, where their major competitors came from.  The site they selected for this endeavor was Singapore.

Section b.    Nature of Interaction with Other Departments

AT;T has an organizational structure built around the lines of business in which the company is engaged in. There are two sectors created within AT;T for the overall management of resources to support the lines of its business: 1) AT;T Communications – for its long-distance service; and 2) AT;T CP – for its telephone manufacturing services.  Each line of business is responsible for its own profitability and its contribution to AT;T revenues (Badaracco and White, 1993).

Section c.     Major Actors and Processes Involved

For this case study, the following major actors are involved:

• Jim Bercaw, AT;T vice president for manufacturing during the time AT;T CP made the decision to outsource.
• The AT;T workers at its Shreveport Western Electric plant in northwestern Louisiana (who were directly affected by the company’s decision to outsource to Singapore).

The following major processes involved in this case study are:

• The use of the process of outsourcing as strategic implementation of the AT;T business strategy of improving its telephone manufacturing facility.
• The basis of behind management’s decision to outsource to Singapore, and the impact of such decision-making on its workers in the US.

Section d.    Nature of Systems and Processes Used

A business strategy is concerned with the overall purpose and scope of the business to meet stakeholder expectations.  It involves managing to business to increase profit and to survive in competitive environments, as well as to build capabilities to provide superior customer value.  The business strategy is a key factor in an organization since it is often heavily influenced by investors in the business and serves to guide strategic decision-making throughout the business (Tutor2U, 2006; The University of Michigan, College of Engineering, 1999).

Creating an effective business strategy necessarily involves strategic planning, which is a dynamic process involving a complex pattern of actions and reactions.  It is divided into two important segments: strategy formulation and strategy implementation (Moncrieff, 1999).   Strategy formulation involves three steps (Markides, 1999, 1997; Wikipedia, 2007a; Moncrieff, 1999):

1) Determining where you are now

This involves performing a situation analysis wherein both internal and external situations were examined.

2) Determining where you want to go

This step involves setting objectives, assessment, and crafting vision statements (for the long term), mission statements (for the medium term), overall corporate objectives (both financial and strategic), strategic business unit objectives, and tactical objectives.

3) Determining how to get there

The last step involves drawing up a business plan.  The objectives set should, in the light of the situation analysis, suggest a strategic plan.  The plan provides the details of how to obtain these goals.

The next phase in strategic planning is strategy implementation which involves, but is not limited to, the following activities: resource allocation; managing cross-functional teams; assigning responsibility of specific tasks or processes to specific individuals or groups; managing the process; and implementing specific programs (Markides, 1999, 1997; Wikipedia, 2007a; Moncrieff, 1999).

In the case of AT;T CP, the business strategy is to maintain a competitive advantage over its Asian competitors by improving its telephone manufacturing facility.   To implement this strategy, AT;T CP decided to make use of the process of outsourcing.

Outsourcing refers to the delegation of the non-core operations of an organization from its internal production to an external entity which specializes in the management of that particular operation  (Wikipedia, 2007b).   Simply put, outsourcing means paying another company to provide services which a company might otherwise have employed its own staff to perform (Learnthat.com, 2004).

  The decision to outsource may be due to any or all of the following: lower operation costs, redirect or conserve energy directed at the competencies of a particular business, or to make more efficient use of the organization’s worldwide labor, capital technology, and resources  (Wikipedia, 2007b).

Part    2.         Theme

The theme selected for this paper is Decision Making.  Specifically, it will study the processes and reasons behind the decision of AT;T CP in outsourcing its telephone manufacturing facility to Singapore.  In doing so, the paper will examine not only the processes involved behind the decision-making, but will also examine the impact of the decision to outsource on the AT;T workers in the US.

Section a.     Evidence of the Decision Involved in Carrying Out Operations

AT;T CP’s AT;T’s decision to relocate a telephone manufacturing facility in Singapore was premised on the fact that all its competitors came from Asia, especially from Japan.   It thus decided to contract out the remainder of its manufacturing requirements to Asian original equipment manufacturers (OEMs).  The logic behind choosing Singapore as its off-shore site was based on several factors:

1) Singapore had a strategic position in lieu of its Asian neighbors and had an excellent natural harbor, with a third of its labor force employed in manufacturing; 2) Singapore was an English-speaking country, and its Economic Development Board provided a kind of one-stop shopping for foreign companies who wanted to do business there; 3) The Singaporean government was known to be squeaky-clean, so corruption and bureaucracy would not be a problem; and 4) There was an existing building immediately available for lease at the time AT;T was looking into venturing its operations off-shore (Badaracco and White, 1993).  These four elements form the elements around which AT;T CP focused its strategic formulation to outsource.  They formed the basis for its decision to outsource to Singapore.

The plan to move to Singapore was also intended to save 10,000 jobs in the AT;T facilities in the US, although it entailed sacrificing 500 jobs in the US as operations were moved to Singapore (Badaracco and White, 1993).

Based on the case study (see Appendix),  the relocation to Singapore appeared to be a good move, since it reduced AT;T CP’s labor costs by 90%, and its overhead costs by 40%.  Overall, it saved 30% of its manufacturing costs by relocating to Singapore, even after accounting for tariffs and transportation costs (Badaracco and White, 1993).

Section b.     Interaction/Focus on Main Groups Affected by the Decision

Unfortunately, the decision to outsource to Singapore had some internal side effects for AT;T CP, and directly affected certain groups or individuals within the sector.   In 1985, AT;T laid of 875 workers at its Shreveport Western Electric plant in northwestern Louisiana, 100 of whom made residential phones.  The remaining 650 residential telephone workers were eventually phased out through subsequent layoffs, transfers, or attrition.  At the time of the layoff, AT;T announced it was shifting its manufacturing operations off-shore to Singapore to cut costs and remain competitive, with the announcement coming in the second year of the company’s three-year contract with the union International Brotherhood of Electrical Workers (IBEW).

According to IBEW, AT;T did not attempt to discuss or negotiate alternatives to moving off-shore with the union (Badaracco and White, 1993).  AT;T workers who were let go received Trade Readjustment Payments, the benefits outlined in their union contracts (which included severance pay based on years of service and extended medical benefits), and Enhanced Training Opportunity Programs which re negotiated by the union to help its members prepare for life after AT;T (Badaracco and White, 1993).

Part    3.         Analysis

The theme of this thesis is the analysis of the Decision Making process behind AT;T CP’s decision to outsource its telephone manufacturing facility to Singapore.   This section will analyze whether AT;T CP’s decision has proven to be successful in implementing its business strategy.  It will also examine the impact of the two elements of strategic planning – namely, strategy formulation and strategy implementation – within the entire organization, particularly from an operational and human resources perspective.

From an operational point-of-view, without considering the impact of the relocation to Singapore on AT;T’s US labor force, the AT;T CP decision to move was a sound strategy.   The hourly compensation of production workers in manufacturing in Singapore is only $ 2.67, based on Exhibit 8 of the case study (see Appendix).  It is does not, by far, offer the cheapest hourly compensation rate of all the other countries surveyed in Exhibit 8 – Hong Kong paid $ 2.40, while Malaysia paid $ 1.60 hourly rates on its production workers in manufacturing.

Yet even though Singapore does not offer the lowest or even one of the lower compensation rates for its workers, relocating to Singapore had many other benefits that would make it a logical choice, particularly for a US company that is venturing to an off-shore location for the first time.  As mentioned, the government in Singapore is squeaky clean – the company would not have to struggle with corruption, red-tape, and bureaucracy which are quite prevalent in Third World countries.  In addition, Singapore has not had a history of religious or civil wars, like Malaysia, even though the latter also offers a one-stop-shopping opportunity like Singapore.

However, unlike Thailand and Malaysia, Singapore is an English-speaking country, which is important in helping to launch the off-shore plant according to the US strategies and mission visions.  Even though AT;T’s  vice president of manufacturing at the time, Jim Bercaw, stated that they did not want to build an American factory in Singapore, but eventually wanted a plant run solely by Singaporeans, the fact that the labor force could speak English at the initial launch of the plant is crucial.

All training materials, and most importantly, company communication materials pertaining to AT;T’s CP business foundation (“Business Passion” and “Shared Values”) are most likely in English.  To impart these values to the Singaporeans would be easier if they spoke English as well.

Based on the Exhibits, particularly Exhibit 8, Singapore appears to be  the best off-shore location, especially since this is the first time the company ventured into non-US manufacturing operations.  From an operational perspective, thus, the decision to outsource to Singapore was a good strategy.  However, a different opinion is present with regard to the impact of such a decision to AT;T CP’s labor force.

The problem with AT;T CP’s approach was that it was simply reactive.  It did not prepare or anticipate thoroughly the impact of such a decision on its workers – many of whom have built their lives around the company and have been loyal to AT;T for many years.  CP implemented its decision without seriously considering the impact on its US work force and without consulting or at least briefing and negotiating with the union.

Even though from an operational perspective, the move to Singapore drastically reduced manufacturing costs, the operations in the US still remained a vital element in AT;T.  And operations in the US was strongly linked with the morale and human resources management of its workforce.  I believe AT;T should have first considered their options in the US – there was a US Greenfield site in Texas or the AT;T “factory-within-a-factory” (Badaracco and White, 1993, p. 19) plant available.

The company should have thoroughly exhausted their options domestically, and should have conducted business plans or feasibility studies of containing their operations within the US.  As their executives themselves admitted, the jump to Singapore was literally a jump, and “iffy” situation that merely reacted to intense competition.  Their main premise, after all, for moving to Asia was simply because their competitors were Asian.

AT;T should have considered the possibilities of replicating the quality of work and operations of their competitors in domestic territory first.  Feasibility studies of developing a manufacturing plant to rival their competitors could have considered the cost and length of time required to re-train their current workforce, to determine the kind of training they needed, and to determine their trainability.  In other words, it should have first exhausted all remedies available within the US before shifting its operations outside the country.

Part    4.         Conclusion

In conclusion, even if it more cost efficient and profitable to simply shift their operations to Asia, AT;T should have still prepared its internal workforce for the impact of the decision to outsource.    It took great pains to redevelop a company strategy that is all about “Business Passion” and “Shared Values” but in failing to prepare their people in the decision to outsource, and to allow them to participate even in a small way in the decision, completely belies this mission and vision of the company of putting people first.

Laying-off is always a painful process, and AT;T should have been prepared with the impact of lay-offs on worker morale and on its organizational culture as a whole.   Negotiating with the unions, open forum discussions with the unions, members, and workers, and a thorough review of performance evaluations should have been in order.  Workers should have also been given advanced notice, should they prefer to consider seeking employment elsewhere, or should they want to at least prepare themselves and their families financially on the prospect of an impending lay-off.

The reactive measures taken by AT;T – on offering severance packages and retraining programs, among others – were commendable, but they do not account for the impact on morale especially of the workers who were retained.  The workers who were left behind would still be in constant fear of losing their jobs should the company decide to launch yet another offshore operation that may threaten or endanger their jobs.  And the loss of their colleagues does not exactly make for a happy and motivating work environment.

What the AT;T CP case study clearly shows that Decision Making has a tremendous impact on all aspects of an organization, and as such, strategic planning before actual implementation of a business decision is crucial.  In both formulating and implementing the strategies needed to implement a decision made, management or the decision-makers in the organization must carefully analyze and prepare the impact of such a decision throughout the entire organization.

BIBLIOGRAPHY

Badaracco, J. and White, W. (July 7, 1993),  AT;T Consumer Products, Harvard Business School Case # 392-108,  Boston, MA: President and Fellows of Harvard College, Publishing Division, Harvard Business School.

Learnthat.com.  (2004), outsourcing Definition, [Online], Available from:

;http://www.learnthat.com/define/view.asp?id=685;   [13 May 2007]

Markides, C. (1999), A dynamic view of strategy, Sloan Management Review,  40: 55-63.

Markides, C. (1997), Strategic innovation, Sloan Management Review, 38:  31-42.

Moncrieff, J. (1999), Is strategy making a difference? Long Range Planning Review, 32(2): 273-276.

The University of Michigan College of Engineering.  (1999), What is Strategy? [Online],  Program In Manufacturing, Available from:  ;http://www.engin.umich.edu/class/mfg501/mfg501_1999_dist/tsld003.htm;  [13 May 2007]

Tutor2U.  (2006), Strategy – what is strategy?  [Online], Available from:  ;http://www.tutor2u.net/business/strategy/what_is_strategy.htm;   [13 May 2007]

Wikipedia, The Free Encyclopedia.  (2007a),  Strategy dynamics, [Online], Available from: ;http://en.wikipedia.org/wiki/Strategy_dynamics;   [13 May 2007]

Wikipedia, The Free Encyclopedia.  (2007b), Outsourcing, [Online], Available from:

;http://en.wikipedia.org/wiki/Outsourcing;   [13 May 2007]

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